Risk management in Hydro is based on the principle that risk evaluation is an integral part of all business activities. Consequently, the business areas have the main responsibility for risk management, utilizing established policies and procedures. Their work is coordinated by staff units at the corporate level. The board of directors regularly reviews and evaluates the overall risk management system and environment within Hydro.
Hydro faces risks and uncertainties within its worldwide business operations and in the global marketplace. The company is exposed to changing economic and market conditions and there has been continued uncertainty regarding economic developments within the countries and geographic regions in which Hydro operates. Most of Hydro's primary aluminium plants are located in countries experiencing strong currencies and/or inflationary pressures, which weaken the competitive position of some of our operations. Compensating for future market declines is dependent on the company's ability to sufficiently reduce our operating costs. Hydro may not realize the benefits expected from the planned Sapa joint venture. The Vale Aluminium acquisition represents a significant portion of Hydro's capital employed and the company may not realize the benefits expected. A deterioration of Hydro's financial position or downgrade of the company's credit rating could increase its borrowing cost and cost of capital. Hydro faces an ongoing risk of counterparty default. Price volatility can have a significant impact on Hydro's reported results. Hydro's reported and operating results and competitive position are influenced by developments in currency-exchange rates and in particular the U.S. dollar, Brazilian Real, Euro and Norwegian krone. Hydro is exposed to changing legislation on reducing CO2 emissions. Major accidents, legal proceedings or investigations and incidents relating to HSE and corporate responsibility could impose significant costs and substantially damage the company's reputation. Hydro may not be successful in attracting and retaining sufficient skilled employees.
Hydro's main strategy for mitigating risk related to volatility in cash flows is to maintain a solid financial position and strong creditworthiness. In order to protect processing and manufacturing margins against raw material price fluctuations, Hydro's downstream and other margin-based operations are hedged to a certain extent. Hydro also uses derivatives to reduce its overall financial and commercial risk exposures. Forward U.S. dollar currency contracts have been used and Hydro has, to a limited extent, entered into forward contracts in other currencies to hedge certain revenue and cost positions.
